Chip Maker’s Turnaround Flips Switch on Wall Street

The wilderness years for Vitesse were spent transitioning to meet the major shifts occurring in the telecom industry.

During the 1980s and ’90s, the predominant standard for high-bandwidth communication was fiber-optic technology known as Sonet. Vitesse, founded in 1984, developed circuitry components for Sonet-based routers and other devices. Its customers were manufacturers of enterprise-level networking devices, including Cisco Systems Inc. and Hewlett-Packard Co.

But telecom standards in the 2000s began favoring Ethernet, a technology that had previously been confined to home area networks. The relatively inexpensive and upgradable technology was a better fit for a broadband era in which people watched and uploaded high-definition videos on their cellphones.

Expensive process

Moving from one industry standard to another is an expensive process for a company, Gardner explained. While many of Vitesse’s onetime competitors fell away, unable to negotiate this shift, the company doubled down on the hope that Ethernet would continue its growth. The company raised significant debt financing, which it used to acquire other makers of Ethernet components and overhaul its product line.

“It was an all-in bet that Ethernet was the future. If it hadn’t happened, we’d be gone,” Gardner said. “I don’t think five or six years ago people thought you’d be watching HD TV streaming through Verizon. That’s what we managed to predict.”

The company is still dealing with declining sales from its old tech components. Analysts project revenue from those products will dip 50 percent to $12.4 million this year from $24.9 million in 2012.

Another critical part of the company’s rehabilitation has been moving past the aura of scandal.

The SEC’s investigation into illegal stock option backdating, in which a stock is retroactively granted to an executive prior to a jump in price and without resubmitting the required paperwork, ensnared many tech companies in the last decade.

In total, two Vitesse executives were indicted, though all trials ended with hung juries. In 2007, the company and executives settled a class action over backdating allegations for $10.2 million, plus about 3 million shares of stock. In 2010, the company settled with the SEC for $3 million and without any admission of wrongdoing.

Gardner said the new team and direction for the company has made investors overlook past mistakes.

“At this point, most investors don’t know and don’t care. It’s ancient history,” he said. “We fought through those distractions and since then have been able to strengthen the balance sheet.”